What do all manufacturing companies, regardless of industry, have in common? Inventory! It's the lifeline of every company that sells goods. How can it be evil?
Inventory to a supply chain is like water to people. Too much of it would drown you. Too little makes you dysfunctional. So how much is enough? Just as in people, the real question is how fast are you running? Hence, the amount of inventory you need has to do with how fast you can move it. In addition to knowing how much is needed, you also need to know when and where you need the inventory. The fact is that, just like energy, inventory does not get destroyed but transforms from one type to another. And the decision is yours as when you want to transform it from Raw inventory to Work-in-Progress, to Finished-goods; or to decide when to bring it to your site, or move it to another location. These are tough decisions to make, with potentially big impacts on your supply chain. You see, inventory planning is based on a very large number of potential configurations of product types, locations, and timing based on demand and supply factors. So making good decisions about what to do with your inventory can be very complicated! But wait I am not done yet! On top of all these factors, you also have to worry about Acts-of-God, Mother-Nature and even "luck". Yes, luck! In our customer base, we have a major brewery with demand that swings heavily based on weather during the holiday weekends. We also know of a major food processing company in South Africa that is already planning for spikes in demand for "chicken" during the 2010 World Cup. Other examples, SARS in Asia caused shortages of high-tech semiconductor components, and H1N1 Vaccine was in serious shortage, just recently. .
So back to the question: How much, where and when? Most supply chains have many different layers of inventory or echelons. Examples are raw material, buffers in between sites, WIP, finished-goods, distribution centers, consignment locations and more. At any given time, for each layer of the supply chain, decisions need to be made regarding how much, and what type of inventory is needed to maximize your service levels, and minimize your cost. A simple question like that for even a few products can be complex, for hundreds or thousands of products can be mind-boggling, especially when you bring in chance and probability.
OK, here is the good news: MEIO. Multi Echelon Inventory Optimization is designed to do precisely what we have talked about, i.e. minimize your cost of reaching targeted service levels. MEIO deals with the elements of chance and probability at every layer of the supply chain and keeps a tight-eye on cost factors. It knows that Raw material costs a lot less than Finished-goods and has the potential to transform to what the market needs. In other words, MEIO takes into account postponement strategies and the potential to deliver a certain level of service. As the user specifies higher service levels, the system shows the potential increases in cost and recommends what to get, and where to keep it, in order to protect against surprises. It is really cool. And the good thing is that it will save you a significant amount of money in a short period of time.
So you owe it to your company to ask: Do we have enough of what it takes to deliver what we need? Are we losing money for keeping too much or losing opportunities, and market share, because we don't have enough? If you know the answer to these questions, do nothing and you are in great shape. If not, take a look at what MEIO can do for your company.
Inventory is GOOD only if there is the right amount, in the right place, at the right time! MEIO shows you what the "right" is for you.
Dr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please
click here.
I want to encourage you to plan and sell your products like Diamonds!
Allow me to elaborate. Diamonds are sold based on attributes, not product-ID (i.e. SKU-number). Nobody goes to a jeweler asking for a piece of rock, spends lots of money, and walks out of the store with a smile. Instead they ask for a diamond based on the 4C's (Carat, Color, Clarity, and Cut). So the bigger, brighter, cleaner and nicer cuts get priced higher and higher. As logical as this may seem, it amazes me to see how many manufacturers still sell their products like a commodity--giving away valuable things for free. And the root cause is usually the fact that their supply chain planning systems are not capable of handling attributes, in the first place. We see many manufacturers that don't utilize attributes when it comes to planning their supply chain and inventories, and yet work with a mind-boggling number of SKU's. Most of them also complain about high inventory costs, and poor customer service, too. Let's see why that is the case, and how attributes can apply to your products and supply chain-unless you manufacturer the first generation Model-T cars.
The fact is that just about everything has attributes, people do (e.g. kind, tall, smart), Products do (e.g. red, non-combustible, fast), machines do (e.g. speed, efficiency, precision), customers do (e.g. VIP, International, new), materials do (e.g. high surface tension, low grade, hazardous), countries do (e.g. tariffs, sanctioned, no-child labor), Logistics do (e.g. Rail only, Air Express, hazardous route), etc. etc. Adding attributes to all of these objects is not too hard; just add new fields to your data base.
What is important is the ability to plan with these attributes for your entire supply chain, beginning with demand planning, to operations and inventory planning. The ability to have an algebra by which attributes are used and planned with is critical in supply chain planning systems. Imagine having an inventory of sweaters without knowing how many of them are Large, Med, or Small, and how many of them are Red, Yellow, or Green. Clearly you could not make efficient use of this inventory, or forecast and build the right products. As mentioned, there are a lot more attributes than just style, size and color. The following is a typical scenario for a top-retailer:
"A NEW customer is interested in a NON-COMBUSTIBLE product made using a HIGH PRECISION machine, from SOUTHEAST ASIA region. Also, it can not be built in any country with CHILD LABOR, and can only be transported using RAIL or SEA."
Can you imagine having hundreds of customers, with thousands of products, and then trying to forecast and commit with so many different attributes involved. Don't forget, raw material and inventories also need to be planned with just as many attributes. In its full sense, Attribute-Based planning means the ability to take all the relevant product parameters into account when forecasting, planning, sourcing, selecting, pricing, promoting, differentiating, allocating, building, storing, committing, transporting, pegging and more. Without a planning system that considers the attributes, it would be impossible to do the math, plan the supply chain, and commit orders accurately. In fact, lack of attributes in the planning process causes some level of "commoditization," which reflects a company's inability to correctly distinguish its products from the others. In turn, customer requests are undermined, and products' costs and prices are not represented accurately. In most cases, this hurts the profitability of the enterprise in the long run, even if it has a monopoly over the market.
There are a lot more benefits to Attribute-Based planning. I highly recommend reading the more comprehensive ePaper that we just published on this topic: Attribute-Based Planning: How to Avoid Commoditization. Also, Feel free to comment on how you use attributes in your supply chain, or if you are looking for any ideas on how to make better use of attributes specific to your environment.
Dr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.
Is it the People, Process, or System?
Here we go again: "Systems can't solve our problems, we need to fix our processes." Have you heard that before? I bet you have. Also, have you heard this one: "We need better people!" Although, I do not disagree with the importance of processes and people, have you considered that it might not be their fault? The fact is that, Processes, People and Systems are like a 3 legged stool. You take one of them out...and well, you fall on your...(you know what) and it really hurts!
Let's consider each one. If you don't have the right people then you should not be in business--and you have much bigger problems than processes and systems to worry about, anyways. So let's assume that you have the right people. If so, then they are intelligent and experienced enough to put in place the right processes. OK, now you got the people and you got the processes, but why bother with systems--spreadsheets are just as good! I can hear the old-timers saying: "all my life I used spreadsheets and managed to get products out the door for 30 years," or "I don't need no fancy system to do my job!" Well, they have a point, they can do their job. That is not even the question. The real question is how fast can they do it? How accurately can they do it? And how about process integration? (That's gobbledygook for being in synch with everybody else in your organization).
We recently upgraded a client's planning system that took over 23 hours to generate a plan. That meant they were always two days behind in order to get the updated data, run the plan, and then execute the plan. They could have easily avoided building the wrong stuff if they simply had a faster system. Essentially you can lower your inventory by a large percentage if you plan more frequently. Also, you can make better use of your resources by making the right items and deliver on time-because you are making what you should be making in the first place. Now, I know spreadsheets are fast but they are not nearly as fast, accurate, and integrated enough to run an entire supply chain efficiently.
Another telling example: one of our large electronic clients with off-shore manufacturing, in China, used to take about 2 weeks to perform Available-to-Promise (ATP). Why? Well, it took a week in the HQ to check inventory levels and allocations; and another week in China to decide what can be done about it. They overhauled their supply chain planning system and now they are doing the whole thing in less than couple of hours! They did that simply by upgrading their system, and not even touching their people and processes. Remember, no matter how many people you throw at this and how good your processes are, ATP requires a ton of data, and disparate pieces of information, from allocations, to capacities, to suppliers to inventory, to priorities, etc., etc. By the time you bring all these information under one roof, it is too late and your data is too old for the correct decisions to be made. Only systems are fast enough, accurate enough, and integrated enough to pull all that information together in real-time, and give you an answer almost instantly.
Remember, this is not about systems being just faster than people; it's about how the right planning system can take your people, and processes, to a whole new level of efficiency and productivity. But how do you know if you have the right planning system? Well for one thing, if it takes 23 hours to get an answer, or you are using spreadsheets-on-steroids, my guess is that you don't have the right one. If that's the case, stop blaming your people and processes and start looking for one. We recently published an eBook about how to justify a supply chain planning system, and that should provide a few good hints on what to look for when it comes to picking the right system.
I really would like to hear if you have any blame game stories to share with others...feel free to comment any time.
Press Release
Tuesday Jan. 26, 2010
Los Angeles, CA., Adexa, Inc., the global provider of Supply Chain Planning and Performance Management solutions, announced today that Integrated Device Technology (NASDAQ: IDTI), a world-leader in semiconductor manufacturing for digital media, has selected and implemented Adexa's complete Supply Chain Planning suite of solutions, including demand planning, Available-to-Promise, Multi-Echelon Inventory Optimization (MEIO), operational planning, and plant planning.
"This initiative touched every major process running in our supply chain," Said Adhir Mattu, Vice President of Global Information Technology at IDT. "Our team initially focused on Adexa because it ran much faster than our previous supply chain systems, and was easier to use. But the biggest advantage ended up being their industry expertise and ability to leverage best-practices at all stages of this critical project."
IDT is currently maintaining and running all sales, marketing, and planning forecasts on the newly implemented solutions. Moreover, attribute-based planning capabilities are targeted towards further increasing the planning velocity.
"By replacing competing systems with Adexa, IDT bestowed a great deal of trust in us," said Cyrus Hadavi, President and CEO of Adexa. "This is yet another confirmation of our leadership in providing the most comprehensive and fastest solutions for our customers in this industry."
For full version of this press release click: http://www.adexa.com/news_events/default.asp?id=513
Contact us if you have any questions, click: inquiries@to.adexa.com
Here is a question for you, is JIT a push-system or a pull-system? For decades you have been lead to believe that it is a "pull" system, but in fact you are "pushing" to make parts available, thinking that the resource will need it or use it. Just because the resource used the previous supply does not mean that it will use the next. In other words, the past is not necessarily an indication of the future. You may have already known that, and may argue that just filling buffer-zones is the best way to minimize inventory, especially if the buffers are not owned by your company. However, you are just passing the responsibility of holding the supply to some other point in the supply chain, along with the associated cost-of-capital that goes with it. Naturally, the buffers need to be able to handle the largest tolerable demand surge. So, if the past demand is more than the future, then inventory will sit there until it is needed or written-off.
With that in mind, I think it's logical to say that a JIT system that looks at historical demand is really a push-system, but we want to do better than that. We want to be able to look to the future in order to have a real pull-system. At the end of the day, JIT is a cost-reduction system to keep up utilization and reduce inventory levels in a supply chain that has fairly steady demand. What happens if the demand changes all of a sudden? What if red-widgets are more popular than green ones, today? How fast can you propagate the changes by resetting all of the buffers? Undoing the buffers is like pushing the proverbial tooth paste back into the tube! It will stay out until you finally use it, or wash it down the sink. Of course as long as the supply chain is simple, with a linear flow, flat demand, and just a few constraints, fixed buffer-based inventory planning will still work well. But it will also come down crashing if you have tens of different products sharing resources, constant changes in demand patterns, or supply lead-times. These factors, and many others, change the production "rhythm" to the market. Should the supply rhythm on a certain product be bang-bang-bang-bang, or would it be bang-----bang-----bang---.bang? Which rhythm would generate the most revenue and profit while satisfying your customers?
In the final analysis, JIT is a system of Available-on-Supply and it pushes based on a fixed rhythm associated to the speed of a machine or inventory availability. In that case, you better prey the historical demand does not change. Why would you want to be held hostage by your supply?! So what should we do if we want a system that is Available-on-Demand, that is more responsive to changes in the market place. A system like this would change the "beat" and buffer-allocations based on the actual demand, and would be more attuned to the market-whether it be bang-bang--bang, or bang-bang...bang-bang-bang---bangbangbangbangbangbang--------bang. For each product you would have a different "bang" profile. The combination of all the profiles sets the rhythm for your entire supply chain. Hence, when you put it all together, the result is a beautiful orchestration of drum-beats harmonized to the tune of the market demand.
To dynamically re-tune and reallocate material, capacity, and buffers is not easy but it's being done by many best-in-class companies out there. You basically need two critical components, visibility and control of your supply chain. That means visibility into your demand, inventory levels, and the ability to quickly control your production capacity, and suppliers' capabilities. It is not a near sighted system that only looks at one level down the stream. You must understand what needs to be done in all areas of the supply chain as the demand conditions change. To have this kind of control over your supply chain, it takes some reexamination of your processes and advanced technologies in the areas of Demand Planning, Multi-Echelon Inventory Optimization, Production Planning, and Performance Management. Demand Planning will focus on making sure you are getting accurate demand signals from the market, MEIO will help you manage the right buffers for the expected demand, Production Planning will control your supply flow to those buffers, and Performance Management will give you dashboard like visibility over all of these critical points in your supply chain. Again, I have said this many time before, but it's very hard to do this with spreadsheets and pure experience. So take a little time to see how advanced technology can help you in one or more of these areas and you maybe surprised how quickly you can retune your supply chain from JIT to Available-on-Demand.
If you are interested in this topic, I also suggest reading: How-to-Guide: Justify A Supply Chain Planning System, or feel free to contact us at any time.
Dr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.
Paulaner is the largest brewery in Bavaria, Germany, and one of the most well-known brands of beer in the world. Their biggest challenge in their supply chain had to do with the complexity they faced when it came to demand planning, in particular developing accurate forecasts. So the Company went through a very intense selection process to pick the right solution, and we thought it would make for a good article to discuss the details of what Paulaner was looking for and how they found it. It's important to mention that the selection process was managed by Dr. Michael Bell, a former academician, who was the Deputy Head of Logistics for Paulaner at that time, and now working with Coca Cola Corporation. His deep expertise in the art and science of Demand Planning played a critical role in how this comprehensive selection process was lead a successful project.
The goal of the project at Paulaner was to be able to accurately forecast the sale of the 250+ different beer types and sizes. Forecast accuracy is critical since Paulaner manufactures their beer in the heart of Munich and there is very little warehouse space to store finished goods inventory prior to sale to their customers. There are many factors that affect the sale of beer in Europe including the weather and special events such as holidays (like Oktoberfest), making the forecast of beer sales a very interesting task.
Paulaner's selection process of a Demand Planning system started with research on the internet of 56 companies that sold such a systems. Of the 56 companies, 36 companies were sent questionnaires on forecasting and demand management capabilities to narrow the field of contenders to only 8 companies to take part in a forecast accuracy trial. When the selection process was completed it was Adexa's CDP system that was chosen for the task. The main reasons were the accuracy of the forecasting engine and the ease of use for the sales people that would need to manage the demand plan in the system. The implementation time was about 4 months with great results, especially in short and long term forecast accuracy. For the official news release about the selection, please click: "Paulaner Brewery chooses Adexa's Collaborative Demand Planner to optimize forecasts, inventories, and capacity utilization".
To learn more about this project, you can download a post-implementation snapshot by visiting: http://web.adexa.com/demand-planning-for-paulaner-brewery-snapshot/
Or visit our Demand Planning page for more information about the products mentioned.
By Kameron Hadavi, Vice President of Global Marketing and Alliances. For more information about the author please click here.
Supply chain decisions impact internal operations, customers, suppliers and, at the end, revenue levels and profits. The complexities of all the interactions in the supply chain makes it very difficult to understand the true impact of your decisions even if the decisions made are consistent with your previous ones. How would you know what the consequences are under today's circumstances? How would you measure the impact in different areas?
A Supply chain is really one big inter-linking Jigsaw puzzle. Let's say demand is going through the roof for red iWidgets, then should you build more of them at the expense of green iWidgets? If so, which key customers are now going to receive their green ones late, as a result? How much effort should you make to avoid the lateness? Should you reallocate your inventories going to the distributors? Or should you add a shift at the plant to increase production capacity? If so, can you count on your current raw-material inventories at the production sites, or can the suppliers get the components to you fast enough? And so on. I am sure you know what I am talking about here. Operational managers have to make tough decisions like these on daily basis to preserve the flow of the supply chain. But can they make the right decisions consistently, time after time, especially when it come to what is best for the Company's bottom-line? Usually these complex supply chain decisions are made based on which customer is screaming the loudest, the experience of an "old timer," or sometimes a person who is only worried about his or her own bottom-line. But can you blame them? Since in many cases, their planning capabilities are based on disparate spreadsheets and their visibility is limited to separate organizations with different incentives. Sales people want to increase customer service and have abundant Just-in-Case inventory, Production people want to decrease inventory and reduce cost, but the financial Side of the business wants to increase profit and decrease working capital. How do we resolve these conflicts and make a decision which is right for the Company?
Supply chain planning technologies have evolved a great deal in the past decade. The right planning system can now model and define competing objectives, such as higher efficiency vs. higher customer service, and calculate the impact of specific decisions in terms of cost, revenue, and profits. In that way, every major supply chain decision becomes "optimized" for all the interrelated pieces that it touches, rather than just one. In Adexa, we call this a Profit-Driven Supply Chain©. In PDSC's, you have the visibility to see the problem, capability to analyze your decision's impact, and then take the best course of action, knowing for certain how it affects the entire picture. Keep in mind, the "best" course of action may not always be the one with the highest short-term profit, but at least you will know how your profit levels were affected by keeping your best customers happy.
Profit Driven Supply Chain is more than a concept! It's defining the future of planning technology, since in most progressive enterprises, the finance people are becoming more and more involved with sales and operational decisions, rather than dealing with its aftermath. For the past two years Adexa has focused its direction on developing PSDC-based planning solutions to marry critical supply chain processes such as Demand Planning, Operational Planning, and Inventory Planning, with full financial visibility. So we have a number of resources available to you if you would like to learn more about this topic. I highly recommend to start by reading an important S&OP benchmark study of 214 companies, by Aberdeen Group, entitled Sales and Operation Planning: Integrate with Finance and Improve Revenue. We also have a great paper entitled: Demand Planning for Profit Driven Supply Chains. Enjoy the reading, and feel free to comment on this blog with any questions, as I will personally answer you back.
Dr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.
The question of should a company use Best-of-Breed supply chain planning system vs. SAP
®-APO has been going on for a long time. Business users have typically wanted more functionality than is offered by SAP, but SAP has always sold to the executives of the IT group on the strength of the lower cost of an integrated system. If the discussion were in any other area besides "supply chain planning", the position of the IT departments would be tough to challenge, but APO is not part of the core SAP system. It is a separate system that just like any other Best-of-Breed planning system is bolted onto R/3. Furthermore, the technology for memory resident planning is very different than for transactional computing, so it is so much harder to leverage core SAP R/3 technology to any cost advantage.
SAP has gotten a pass on the real cost of implementing APO for too long. It is time to examine the real cost of ownership for APO. It would help a lot if IT and supply chain professionals that read this open dialogue contribute to answering the following questions. What is the cost of ownership of SAP's APO? How easy was it to integrate all the data that is required to run APO? Was the big "integration" story worth the results?
For the sake of this analysis the purpose is to not compare functionality, but only examine the cost of getting the system running in the way that supports the desired business process. Are there really IT and cost advantages to implementing SAP's APO? The areas that are worth looking at include: cost of the software, cost of the hardware required to run the system, cost of implementing similar functionality, cost of implementing required supporting systems (such as using Business Warehouse to support the need for analytic views), cost and complexity of integration to and from all sources of data, cost of supporting the system once it is up and running, etc.
I am hoping that we can hold an informal discussion and feedback going on this topic, so please feel free to share your experiences or answers with us. Or feel free to email me at wgreen@adexa.com
About the Author: Bill Green is the Vice President of Solutions at Adexa, for more information about him please visit http://adexa.com/company/green.asp
Inventory is insurance against the unknowns in the supply chain. It protects you if surprises occur with demand or supply. Just like the insurance you buy for yourself, it is important to spend the right amount of money in the right points of your supply chain in the form of inventories (i.e. safety stocks).
If spent wisely, inventory dollars will have a beneficial impact on a company's ability to service its customers properly and help keep direct and indirect costs low. Too much inventory wastes capital, and increases the risk of obsolete goods. With too little inventory, you are risking lost sales, stock outs, and increased direct costs from disruptions in operations. There are many stakeholders that worry about inventory positions at many different levels of the supply chain, and their objectives are not always the same; in fact it may be contradictory. For example, sales people love to cushion themselves with lots of inventories in order to make sure they will always have product to sell, while the CFO wants to cut inventories as much as possible in order to save capital and improve the Return-on-Asset ratio. So optimized management of inventories can be become a very difficult issue and its complexity can skyrocket as the number of tiers in your supply chain increases.
In the recent past, a whole new breed of supply chain planning solutions have been developed and dedicated to better management and optimization of inventories. They are called Multi-Echelon Inventory Optimization (MEIO) systems and there are a handful of vendors that provide them. Of course different systems use different algorithms and techniques to address this highly complex issue, so you definitely need to do your homework before jumping into purchasing one.
Adexa includes multi-echelon inventory planning as an option in its Sales & Operations Planning (S&OP) platform. We like to think we have a distinct advantage in this area due to our holistic approach to planning the entire supply chain, not just parts of it. Naturally, that is very important since inventory planning is not done in isolation. It should heavily consider factors such as demand forecasts, manufacturing capacities, and supplier capabilities, within one integrated planning environment. But Adexa actually throws in one more advantage. We tie all of this planning data to key financial measures. That basically means, you can review your supply chain planning decisions based on their financial impact, especially when it comes to revenue, profitability, and return-on-assets.
Many supply chain managers are looking to learn more about MEIO and trying to understand if their company should be utilizing this type of inventory planning solution. The simple answer is if your enterprise has a multi-tier supply chain (e.g. more than one plant, DC feeding regional DC's or customer hubs, etc.), or if your products have key components that are used commonly across multiple end-items, then you should be considering MEIO as a way to cut costs and increase customer service levels.
For more information you may want to check out one of our latest webcasts on this topic by visiting our Supply Chain Planning Webcast Library.
Almost everyone understands the role that people, processes and systems play in running a modern day enterprise. What they might disagree on is the importance of the role each one of these legs plays to holdup and grow the enterprise. The role of people and processes are given. The Systems' role is the least understood aspect of the three. There are many managers who believe systems are all the same and as long as the basics are covered any additional sophistication does not add any value. We disagree! And here is why:
- Systems enforce good practices and processes: Companies spend a lot of time and money to design business processes only to see them deteriorate very quickly as people and organization, as well as processes change. Systems are capable of cross checking millions of variables in the business and point out inconsistencies, lack of proper data and information, or point out who has not done their part. They can check and monitor what we should be doing and how we are doing it!
- Unlike people, systems are fast, very fast! How can you check across 3 continents, to provide reliable delivery information to an end customer when you have thousands of products, suppliers, customers? In addition, systems are capable of analysis across millions of variables. An example is a system for Multi-Echelon Inventory Planning where it can calculate the right level of inventories across multiple layers of the supply chain to ensure the desired service level. It does not matter how many people you throw at this and how often they meet, they will not be able to optimize nearly as well or as fast! So how is that done now in most companies? Well just using their gut feeling and experience which might be good but it can be done better, and in most cases, a lot better. The right system for inventory planning can easily save millions of capital dollars and facilitate for much better customer service.
- System tie processes together, for exmpale planning to execution, sales to operations, and forecasting to financials. Generally disparate spreadsheets are incapable of integrating these processes resulting in waste, delay and sub-optimal results.
- Systems allow you to plan more frequently which results less inventories. Systems can help us plan what to build, where to build, where to keep, what to keep and when to do it all-accurately. And they can plan the entire supply chain in minutes, allowing multiple planning runs per day as the demand and supply conditions change. In the absence of the right system, inaccurate plans are done based on spreadsheets, once a week or month, resulting in excess inventory and lower customer service levels.
- Systems keep people accountable, e.g. forecast accuracy by sales or customers, commit vs. actual in production, and supplier delivery performance. They also play an active role to point out where the excesses are and where the deficiencies lie.
Given the above, would you trust millions of dollars of your assets to just a spreadsheet?
There is a comprehensive eBook on this topic with a lot more detailed information. To download please click on "How-to-Guide: Justify a Supply Chain Planning System".